Do stakeholder relationships matter? An empirical study of exploration, exploitation and firm performance

Purpose The purpose of this paper is to investigate the performance implications of two major mechanisms for organizational learning (i.e. exploration and exploitation). Exploration refers to firm activities that explore new and novel knowledge, whereas exploitation reflects the extent to which a firm reuses its existing knowledge. The authors predict curvilinear (i.e. an inverted U-shape) relationships between exploration/exploitation and firm performance, respectively. That is, firm performance first increases with exploration/exploitation at a decreasing rate; then, firm performance decreases at an increasing rate after firm performance reaches a maximum point. Furthermore, the authors examine whether the curvilinear relationships are moderated by two types of firm-stakeholder relationships (i.e. firm-employee and firm-customer relationships). Design/methodology/approach Using the data from National Bureau of Economic Research, US Patent Citations Data File, KLD Research and Analytics Inc. and Compustat series, the authors construct an unbalanced panel data set of 3,070 observations in 554 firms from 1991 to 2006. To test the hypotheses, feasible generalized least squares regression is used. Findings In consistent with the prediction, the authors find inverted U-shape relationships between exploration/exploitation and firm performance. The authors also find that the curvilinear relationships are moderated by firm-employee relationships. The relationships between exploration/exploitation and firm performance become stronger when firms have better relationships with employees. Research limitations/implications The study provides empirical evidence that better firm-employee relationships can strengthen the curvilinear relationships between exploration/exploitation and firm performance. The authors argue that future studies should extend to other stakeholder relationships, using more refined measures, and incorporating the concept of ambidexterity. Practical implications The findings suggest that managers should design innovation strategy based on performance implications of exploration/exploitation and that managers should also realize that stakeholder relationships can influence the relationships between exploration/exploitation and firm performance. First, the study shows that although exploration and exploitation can improve firm performance, too much exploration or exploitation is not good for firm performance. Therefore, managers should consider seriously the maximum point of performance that exploration and exploitation can reach and avoid too much exploration or exploitation. Second, firms can invest in firm-employee relationships to gain better performance implications from exploration/exploitation. The study shows that, as firms develop better firm-employee relationship, the relationships between exploration/exploitation and firm performance are stronger and firm performance is likely to reach a higher apex. Originality/value The authors find the inverted U-shape relationships between exploration/exploitation and firm performance, moreover, the authors add two contingent factors associated with stakeholders that can help exploration and exploitation contribute more to firm performance.